A home improvement loan is one that is designed to allow you to make repairs or upgrades to your home. When you want to make costly improvements, a loan is often the only way you can manage the expense, and home improvement loans are based on the idea that your home will be worth more once the repairs are completed.
What are the types of Home Improvement Loans?
There are many things to consider when taking out a home improvement loan. Because there is more involved with a loan tied to home improvements, you are going to have to go through more steps and keep up with more paperwork than you would with a refinance or a straight mortgage. It is possible to borrow money with these types of loans to do work on your house, but you must have enough interest in the house to make the loan feasible. Often a person who needs a home improvement loan does not have the equity to borrow enough to make repairs or upgrades. In this case, a loan designed strictly for home improvement is the only way you can acquire these funds. Because this type of loan is for a specific purpose, the lender will expect more documentation of the use of the funds. For this reason, these loans generally entail more costs than other types of home loans.
How do I get a Home Improvement Loan?
Most loans of this type begin with a baseline appraisal of your property. An appraiser will visit your home and take measurements, look over the structure and inspect problem areas, and compare the value of your home with others in your area. The appraiser may also be asked to project the value of the repairs or additions you are proposing for your home. Once you have a baseline appraisal amount, you can begin to think about how much you can borrow for home improvement. This will depend on the current value of your home, your current mortgage balance, and the value of the improvements which will be made. As an example, suppose that you have a house which is worth $100,000, on which you owe $90,000. You want to make repairs valued at $25,000. The new value of your home will be $125,000, so theoretically you have $35,000 in equity once repairs are made.
In the above example, the total value of your home does not mean you can borrow $35,000. Most lenders are
hesitant to make loans of more than 85% of the home’s value, so you can reasonably expect to borrow up to $106,250. If your balance is $90,000, you could borrow up to $16,250 for your home repairs. The other $3,750 required for the repairs would have to come out of your pocket.
While this is an average example, there are, of course, exceptions. Some lenders will loan 100% on the value of a home if the repairs you are considering are likely to boost the home’s value by much more over the next five years or so than the projected 25%. Some lenders will also make small loans as second mortgages to supplement the amount of your home improvement loan.
You will need Estimates!
Before you seek financing, however, it is also important to have a good idea of exactly what these repairs or improvements will cost you. Have three reputable builders give you estimates, and keep in mind that these figures are just that—estimates. The actual cost can be either higher or lower, although a good builder can often come close to the actual final cost. If the estimates are widely different, it pays to find out why. Some builders simply charge more; however, some builders will lowball an estimate by using the cost of cheaper materials or cutting labor costs, which means that your work will take longer. Be aware and ask question of the builders about their proposals.
Once you have selected a builder and gotten a good estimate, you are in a position to approach a lender. The lower the percentage of money you have to borrow outside of your equity, the better your chances of getting a reasonable interest rate and approval on your loan. Your lender will carefully scrutinize any builder’s estimates you submit, looking for very low or high figures. This is a good reason to get more than one builder’s estimate, as well.
Many home improvement loans are given on an “as-needed” basis, so that you can make draws against the loan as you need to in order to pay contractors. You will be responsible for keeping up with copies of the bills and your payments. After the work is done on your house, your lender will also want an inspection. The “walk-through” is designed to insure that all the work is completed correctly. After the inspection is done, your lender will give final approval and “close” the loan, and your payments will be set.